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Capture and Test your Cost Assumptions

You’ve tested your Product-Market fit, and you believe you’ve found the “emphatic yes” that says there is indeed a market opportunity.  Next question: can you build a profitable business based on that opportunity?  To figure that out, you need to capture and test assumptions on the cost-side (the left side) of your business model canvas.  The cost-side of your business model canvas is used to record your assumptions on:

  • Key partnerships you’ll need (and you assume you can develop)
  • Key activities involved in running/growing your business
  • Key resources you’ll need to run/grow your business
  • The Cost structure of your business

The partnerships, activities and resources all feed into the cost structure.

Step 1: Capture your Cost Assumptions

With your team and advisors, walk through the 4 segments of the canvas listed above, and write down your testable hypotheses.

Step 2: Test your Cost Assumptions

Now it’s time to test.  Like testing your Product-Market fit, this involves “getting out of the building” and talking with people.  But in this case, you’re not talking to customers.

Key Partnerships: Go talk to the partners you’ll need.  Or at least go talk to others who have worked with those partners.  You want to understand whether/how they will be motivated to work with you, what it will cost, and how the partnership works.

Key activities and Key Resources: One way to test these assumptions is to talk to entrepreneurs who have build similar businesses.  That can give you a very helpful reality-check as to what is involved in building your type of business.

Cost Structure: Entrepreneurs who have built a similar business can help with this too.  And try talking with CFOs who have experience in your market (or in a similar type of business).  An experienced CFO can be an excellent source of “reality check” for you new-business cost assumptions.

Think Ahead to your Financial Projections

Validating cost assumptions is not an academic exercise!  You’ll need to thoroughly understand your cost structures to build financial projections – and financial projections are a critically important tool in helping you plan and manage your business and your funding needs.  So you need to dig-in and understand your business’ partnerships, activities, resources, and the impact that has on your cost structures.  You’re gathering the assumptions and understanding that will underlie your financial projections.

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